Unit 3 · Level 4 · Factors & beyond the index
The big four factors
Decades of research found that certain SLICES of the market have historically returned more than the market itself: cheap stocks (value), recent winners (momentum), profitable low-debt firms (quality), and smaller companies (size). These are called factors. The premiums are real in the data, and they come with long, painful stretches of lagging. No factor is free money; each is a different way of getting paid for discomfort.
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What you get asked
Match each factor to its intuition
Four tilts, four intuitions. Notice value and momentum almost contradict each other: buy the unloved versus buy the winning. Both worked historically.
WHY might factor premiums exist at all? The honest academic answer:
The risk story: you're paid for bearing pain others won't. The behavior story: you profit from others' biases. Decades in, academia still argues, so healthy skepticism is the correct posture.
The value factor means tilting toward stocks that are ___ relative to their earnings.
Value buys the unloved and waits. The catch: some stocks are cheap for excellent reasons, which is why value is a broad tilt, not a stock-picking trick.
The hidden price of every factor tilt is…
Value famously lagged growth for most of the 2010s. If a premium never hurt, everyone would hold it and it would vanish; the pain is arguably where the pay comes from.
Who should even consider factor tilts?
A tilt abandoned mid-slump is just the behavior gap wearing a lab coat. Plain world indexing remains a perfectly complete strategy. 🐜
The rest of this unit
Value, momentum, the factor zoo, and the marketing machine built on top.